Industry Spotlight: Bank Street On Last Week’s Fiber M&A – Part 2

Last week was truly a remarkable one for M&A transactions and other strategically important developments in the world of Bandwidth Infrastructure, so we took the opportunity to sit down with Bank Street’s James Henry (JH), Richard Lukaj (RL) and Peter Beckett (PB) to get their perspectives on the news and its implications for the sector. Here is the second part of our two-part interview in which we look at Lightower’s merger with Fibertech and the formation of Communications Sales & Leasing.

JH: We view the Lightower acquisition of Fibertech as a very important transaction for the Bandwidth Infrastructure sector. The combined company should have roughly $700 million of revenue and $400 million of EBITDA, establishing it as a more powerful and significant competitor on the national stage and likely paving the way to an initial public offering. We estimate that the $1.9 billion purchase price for Fibertech represents a multiple of12.5x to 13.0x 2015E EBITDA, an attractive multiple that reflects the quality of Fibertech’s asset base and the great visibility that it has into future growth by virtue of its long-duration contracts with the wireless carriers among other carrier and commercial customers.

TR: Were you surprised to see Lightower come out as the winner as opposed to Zayo?

RL: Zayo would've been the odds-on favorite given their aggressive M&A strategy to date and their willingness to pay premium multiples for premium assets, particularly given their public market trading levels. They also have an affinity for dark fiber and wireless backhaul in particular, so Fibertech would have been a valuable addition to their portfolio of assets in nearly every respect. However, we understand that Lightower moved preemptively in advance of any formal process to quickly put forth a fully-financed offer that was compelling both to Court Square Capital Partners as well as to Fibertech’s management team, which will be an important part of the pro forma company as the new Lightower will include the best resources of both organizations.

TR: Do you think that Lightower will pursue an Initial Public Offering after the Fibertech merger closes?

PB: Yes, we believe that an initial public offering would be available as a next step for Lightower. If you look at the prevailing market multiples of Bandwidth Infrastructure companies like Cogent, Level 3 and Zayo, which trade at 11.4x to 13.7x forward EBITDA, it's clear that there is strong interest from public investors and a relatively limited number of ways to play in this asset class. A public listing would give Lightower a currency that it could use to pursue future merger and acquisition opportunities including larger scale transactions that would otherwise have required its current investors to dig deeper into their pockets. An IPO can also provide a path to liquidity for current investors as we have seen with some of Zayo’s shareholders.

TR: What does this transaction mean competitively for the other players in the sector?

JH: First, the new Lightower will have a significantly larger geographic footprint and a deeper asset base across markets that represent nearly half of the U.S. economy. So, we would expect the pro forma company to be much more formidable as a competitor for large enterprise and carrier contract opportunities that have a super-regional or even national dynamic to them. Second, Lightower has proven itself to be an ambitious and highly successful consolidator, so we would expect the company to be a player in future M&A transactions in competition with other players such as Level 3 and Zayo. That variable could be particularly interesting if Lightowercontinues to move to establish a national footprint.

TR: Yes, Lightower has been moving steadily westward since its inception. Do you think the company has national ambitions?

RL: Lightower has been very deliberate in its expansion, acquiring assets that have allowed it to fortify its position in existing markets and to expand into contiguous geographic markets. Over time, we see merit to continuing this expansion geographically across the U.S. in order to be a more viable counterparty for large scale national carrier and enterprise opportunities and simply to have a broader addressable market opportunity to pursue. Also, in addition to growth potential in the U.S., we see opportunity for Lightower to further expand its presence in Canada, particularly in markets like Toronto and Montreal that have significant communities of interest within its current footprint. In any case, Lightower is well endowed with talent and has among the best performance metrics in the sector, so we expect to hear more about their continuing successes.

PB: Yes, Communication Sales & Leasing started trading as an independent real estate investment trust (REIT) last week and now has an enterprise value of $8 billion which represents 11.3x pro forma 2014 EBITDA. The REIT trades at a significant premium to legacy Windstream and now has a nicely valued public currency that it can use to make acquisitions in order to expand and diversify its revenue stream away from Windstream as its sole tenant. Overall, it's hard to ignore the fact that last week’s financial and strategic developments highlight the remarkable breadth and depth of the buyer universe for Bandwidth Infrastructure assets and the very attractive valuation levels available to sellers in the current market.